Lessons from 1929
WILL this be the week that the United States dollar stabilizes and financial markets calm? That would be welcome. And yet, the warning signs continue to flash, notwithstanding a spate of good economic news lately, including a lowering of the civilian unemployment rate in the US from 6 percent in October to 5.9 percent in November, as well as cuts in European interest rates. It is increasingly clear that the stock market crash of ``Black Monday,'' Oct. 19, 1987, was signaling deep concerns about the structure and well-being of the global economy. The market downturn, it should be emphasized, was not just American. It has been international.
That is why policymakers must gird themselves for coordinated international action. Some steps are already under way, such as last week's cooperative effort on European interest-rate cuts, spearheaded by Bonn, as well as the congressional-White House budget deficit agreement in Washington.
But much more remains to be done, including the convening of a meeting of Western finance officials; forging a joint agreement to hold the US dollar at current levels; ensuring a continued infusion of credit within the United States, as necessary, to spur growth; and signaling a clear rejection of passage of a protectionist trade measure by Congress.
Finally, the White House should acknowledge that attempting to shore up manufacturing and boost US exports by lowering the dollar has been counterproductive and will no longer be administration policy.
What was the rationale for allowing the dollar to go into free fall? To head off a protectionist trade bill? A White House veto would do that. To boost US exports and thus ``save'' manufacturing industries? But promoting exports is as much a problem of quality as of cost. The manufacturing sector, for all the talk about its demise, still approximates a third of the overall economy - about where it was during the Eisenhower years - although the manufacturing mix has changed.
Comparing the economic world of 1987 to 1929 - as many commentators and analysts have been doing of late - is in many ways superfluous. The immediate challenge is to avoid recession, not something worse. And many economists continue to see a growing global economy, although at lower rates.
Still, lessons from the late 1920s are important to recall:
Nations in that period turned inward - rather than working together to meet their shared economic challenge.
Protectionism - specifically the passage of the Smoot-Hawley trade bill in the US, signed by a reluctant President Hoover - was a key factor in the sharp contraction of global commerce that occurred after 1930.
Monetary policy in the late '20s was kept tight, rather than eased for growth.
Current conditions have made enactment of a protectionist trade bill absolutely the wrong thing to do. Some lawmakers, however, still want to take up the measure early next year.
President Reagan should veto any such legislation, if it reaches his desk. And planning new retaliatory trade measures against Japan, as a top administration official announced last week, seems ill-timed. This is the moment for cooperative action - not a retreat into isolationism.